Proposed Takeover Will Overshadow Forest City Earnings

FCE.A stock - Proposed Takeover Will Overshadow Forest City Earnings

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Forest City Realty Trust (NYSE:FCE.A) has agreed to be acquired by Brookfield Asset Management (NYSE:BAM). Forest City, a diversified real estate investment trust (REIT), struggled for years as a financial crisis and declining demand for retail space weighted on FCE.A stock for years.

Despite these challenges, the merger agreement has drawn scrutiny from many quarters. As the company approaches its next quarterly report, revenue and earnings will likely become a secondary focus for most investors.

FCE.A Stock: Buyout Details

Founded in 1920, the Forest City REIT has acquired different property types in many large metros across the country. Despite the base of operations in Cleveland, the REIT focuses primarily on properties in its core markets — New York City, Washington, D.C., Boston, Dallas, Denver, Los Angeles and San Francisco.

FCE.A stock held a portfolio, which included 6.3 million sq. ft. of office space, 2.3 million sq. ft. of life science real estate, 2.2 million sq. ft. of retail assets and 18,500 multifamily units.

When the company reports second-quarter earnings, most of the focus will likely turn to the sale of these assets. Under the terms of the proposed merger, Brookfield will pay $25.35 for each share of FCE.A stock. This values the company at $11.4 billion, including the company’s debt. This $25.35-per-share price is 26% higher than the price that FCE.A stock traded before talks of such a buyout became publicly known.

Investors Should Consider the Merger’s Merits

Despite this premium, many parties have expressed displeasure with this takeover. This buyout already faces investigations by several legal firms. They allege that Forest City’s board failed in its fiduciary duty to find the best possible price for FCE.A stock.

Succeeding with such a suit may prove difficult. The retail sector constitutes about 25% of the company’s operating income. This sector has suffered as e-commerce has decreased the demand for retail space. Forest City revenues fell by an average of 1.5%-per-year over the last five years.

Profits have seen a more dramatic decline. The company suffered losses in both 2014 and 2016. Operating income also fell by over 40% in 2014, and it has yet to recover to 2013 levels. The stock also struggled through the financial crisis. FCE.A stock fell from a high of $73.84 in June 2007 to a low of $3.38-per-share by March 2009. The equity would never make it back to that all-time high.

Also, dividend growth lagged as FCE.A stock fought to remain consistently profitable. Regulations require REITs to pay 90% of their net income in dividends to avoid taxes on revenue.

Despite this rule, Forest City did not pay dividends between 2008 and 2016. Such a dividend drought for a REIT is quite unusual. Even direct peers such as Cousins Properties (NYSE:CUZ) managed to keep its dividends amid a similar stock price decline. If nothing else, this type of situation makes arguing for a larger premium on the FCE.A stock price difficult.

The Bottom Line on FCE.A Stock

The company will announce earnings for the second-quarter for FCE.A stock on Aug. 2. However, given the merger and the shadow of lawsuits looming over the merger, revenues and earnings will likely become a secondary focus.

FCE.A has struggled for over a decade as a financial crisis and a retail real estate decline weighed on the stock. Although Brookfield agreed to pay a 26% premium, the agreement prompted legal investigations related to the price.

Despite anger over the agreement, one must consider the negatives, or rather their effects. Whatever nostalgia one might have for 2007 highs, one cannot escape the fact that FCE.A stock is a REIT that went eight years without paying a dividend. Given the past challenges and the continued struggles in the retail sector, investors likely have few options with FCE.A stock other than to consider it a part of Brookfield.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow him on Twitter at @HealyWriting.

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